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The new IRS guidance includes more options when it comes to unused funds in an employee’s health flexible spending accounts (FSAs) and dependent care assistance programs (DCAPs). The options include increasing the FSA carryover limit and an extended period for incurring health FSA or DCAP expenses.
IRS Notice 2020-29 states that employers can also allow employees to apply unused amounts remaining in a health FSA or a DCAP at the end of a plan year ending in 2020 (or grace period ending in 2020) to pay or reimburse expenses incurred through December 31, 2020. This applies to all health FSAs including those that allow carryovers.
The IRS has also relaxed the mid-year election change rules for health FSAs and DCAPs for 2020 to allow participants to revoke their elections, make new elections, or decrease or increase existing elections.
IRS Notice 2020-33 states that the health FSA carryover limit for unused funds at the end of the plan year has increased from $500 to $550. This change is effective for plan years beginning in 2020 (and reflects the maximum amount that may be carried over to the immediately following plan year beginning in 2021).
Employers who implement these changes must adopt an amendment for their Section 125 cafeteria plans by December 31, 2021. Employees must be notified of the changes.
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Additional Resource
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